Monday, September 30, 2013

On The Supposed Tuition Crisis

Looking For A Crisis That Doesn't Exist?

President Obama, pictured above in an official White House photo, recently unveiled proposals designed to rein in what he called the rising cost of attending college.  Focusing in particular on public universities, the President and the White House claimed that rising tuition leaves graduating students with too much debt, the prospect of which, the President said, even deters some students from attending college in the first place.  Under the President's plan, the national government would develop a metric for ascertaining how much "value" each college provides its matriculants and reward schools  deemed to be "higher performing" and "providing the best value."  In particular, low income students at "higher performing" schools will receive larger Pell grants than those who attend other schools.  Proposed metrics for assessing quality include percentage of students who graduate and "access," measured by the proportion of students from low income families.

Many commentators are considering these proposals for subsidizing centrally-determined indicia of value "on the merits," with many expressing skepticism about whether, if implemented, such proposals will further the President's objectives.  There is, however, a threshold question, namely, what justifies additional federal involvement in higher education in the first place? 

Less than a decade ago, the Economist  opined that, despite occasional controversy, "it is easy to lose sight of the real story: that America has the best system of higher education in the world."   The Economist also opined that the "main reason" for America's preeminence in higher education "lies in its organization." The "first principle" of  this organization, the Economist said, is that "the federal government plays a limited part.  America does not have a central plan for its universities. . . . Instead universities have a wide range of patrons, from state governments to religious bodies, from fee paying students to generous philanthropists."  Thus, America's system of higher education, which reflects the results of competitive federalism and private philanthropy, is the envy of the world.  While the national government provides some financial support, such assistance often takes the form of Pell Grants and various incarnations of the G.I. Bill, both of which  are the economic equivalent of vouchers that empower students to choose among innumerable institutions competing for their patronage. 

There is no reason to doubt the Economist's assessment of the quality of the U.S. system.  Recently the London Times published its World University Rankings.  20 of the top 25  universities are American, as are 34 of the top 50.  A different system, the Academic Rankings of World Universities, places 19 American universities in the top 25 and 35 in the top 50.  Moreover, each year thousands of foreign students flock to America's universities, leaving home temporarily and often paying significantly higher tuition than they would pay for an undergraduate education in their home country.  Given the virtues of competitive federalism and the advantages of private markets over planning, it is no surprise that such a decentralized system produces so many high quality institutions of higher education.

Proponents of the President's proposal to introduce additional planning would no doubt claim that high quality is beside the point if high prices prevent promising young Americans from matriculating.  Indeed, attempting to buttress claims that Federal action is needed, the White House released figures purporting to demonstrate a rapid increase in tuition over the past three decades at the nation's public colleges and universities.  Moreover, the White House also claims that two thirds of students graduate with an average $26,000 in college debt.  The prospect of high debt, it is said, deters some students from attending college in the first place and prevents others who start college from finishing.  Thus, it is said, there is a crisis of affordability in higher education, thereby justifying federal intervention.

Closer examination, however, reveals that, like the reports of Mark Twain's death, reports of an affordability crisis are greatly exaggerated.  In particular, White House data purporting to demonstrate large increases in tuition focus only on the "sticker price" of college and completely ignore the impact of financial aid that so many universities provide.  For instance, some public universities, including the University of North Carolina, Michigan State, William and Mary, and seven colleges in the University of Texas system (including UT Austin), provide free tuition, fees and room and board to low income students.  (See here, here, here and here for a description of these programs).  The University of Washington and Texas Tech offer such students free tuition and fees (see here and here).  Forty percent of students at the University of California at Berkeley pay no tuition.  (See here).   Students who attend Rutgers can receive a need-based grant of over  $9,000 per year, in addition to an educational opportunity grant up to $1,400 per year.  (See here).
Some private universities offer similar programs for families with low and modest incomes.   At the University of Richmond, for instance, Virginia families with incomes of $60,000 or less receive free tuition, fees and room and board. (See here).  Stanford also pays the full cost for families earning less than $60,000, while families earning between $60,000 and $100,000 need only pay room and board.  (See here for the details of the Stanford program.)  Brown University and several other Ivy League institutions have similar programs (see here and here )  Ditto for various other smaller private schools.  (See here).
Financial aid is not confined to that fraction of families with low incomes;  many schools also provide significant discounts to middle class families.  Vanderbilt, for instance, meets the financial need of all families, whether middle class or low income, with grants.  (See here).  So does Davidson.  (See here).       At the University of Virginia, middle class students who demonstrate financial need pay a maximum of 25 percent of the cost of attendance, with grants picking up the rest of the tab.   (See here.)   Texas A & M provides free tuition to families with incomes up to $60,000.  (See here).  At William and Mary, an in-state student from a family of four with an income of $100,000 will receive an annual discount of about $13,000.  (See here).  At the University of California Berkeley, a resident student from a family earning $100,000 would receive a grant of over $8,000; a student from a family earning $80,000 would receive a grant around $10,000.  (See here).   Some states also provide merit-based financial aid.  In Georgia, for instance, students who graduate from high school with a B average receive free tuition and fees at any Georgia public university.  (See here).
These programs are not cheap; the University of Washington, for instance, awarded $344 million in grants to 60 percent of its undergraduates in 2011-12.  (See here).   While federal aid in the form of so-called Pell grants helps fund aid for low income students, colleges make up the difference themselves, often raising money from alumni to cover this gap.  (See here for an example)

To be sure, some students still pay the "sticker price" or a large fraction of the sticker price, and some of these students emerge from college with significant debt.  However, as previously explained on this blog, taking on such debt to pay full tuition can be a very good investment, particularly at the nation's public universities.  For instance, tuition and fees at the University of Virginia, ranked 23rd among national universities, stands at just under $12,500 per year.    (See here)   At the University of North Carolina, the figure is about $8400.   Thus, even those students who pay "full price" pay only a portion of the cost of their education.  At UVA, for instance, tuition and fees equaled 53 percent of the cost of educating an undergraduate in 2010.  (See here).

Given these programs and aid programs at numerous other schools, the "sticker price" is a meaningless indicator of the actual cost of a college education. Indeed, the actual price of attending some of the colleges listed above is lower for some students, even before adjusting for inflation, than it was three decades ago, when many such financial aid programs did not exist. In the University of California system, for instance, 65 percent of undergraduates receive grant aid, and the net combination of tuition and fees for California residents equals just 40 percent of the sticker price. (See here).   Before declaring a "crisis" and embarking on expanded supervision of our nation's colleges and universities, Congress and the President should generate reliable data about the actual prices and benefits of higher education.  Indeed, the national government seems well-positioned to gather and disseminate such data to prospective students and policy experts alike.

None of this is to say that America's college students "have it made."  Upon graduation, such students will face an unfriendly job market, the product of the slowest economic recovery since the Great Depression.  (See also here and here).  Instead of attempting to micromanage our nation's colleges, the national government should focus on its core responsibility of encouraging robust economic growth and resulting economic opportunity for all Americans, including those who attend college.